The present invention relates to optimizing a portfolio of products, and more particularly to optimizing a portfolio of cuts of meat.
Entities that guarantee payments to customers when an event occurs are exposed to significant financial risk. Examples of such entities are insurance providers or financial services companies that guarantee the forward price of a commodity such as gold or particular cuts of meat. To reduce this financial risk, entities charge an insurance premium which is designed to protect the entity from financial exposure should a series of unexpected negative events occur.
In addition, some entities have developed hedging strategies that involve purchasing securities that are thought to be related to the market price of an underlying product for which the entities secure a forward price to a customer. It is well known in the art, for example, for gold mining companies to buy gold futures when the gold mining company guarantees the future price of a quantity of gold. Holding gold futures operates to minimize the financial exposure of the company should the price that is guaranteed for the quantity of gold not correspond to the market price of gold over time. A disadvantage to the above technique is that the assets in the portfolio (i.e. units of gold) change prices in the same direction and at the same rate as the assets are substantially correlated, which minimizes the ability of the entity to construct a portfolio of assets with offsetting correlations.
Another technique to minimize risk is to diversify the types of assets in a portfolio. Insurance companies, for example, often create a portfolio of insurance policies of different risk levels. An automobile insurance company, for example, may wish to have a portfolio with a suitable mix of high-risk drivers and low-risk drivers to mitigate the risk that a catastrophic incident from a single insured person will cause financial hardship to the company while still enabling the insurance company to collect high insurance premiums from the high-risk group. An insurance company will often design the content of the portfolio based on historical data, however, because there is no evidence that the groups of insured individuals are substantially correlated in a positive or negative relationship, techniques for limiting the risk of an insurance portfolio while maximizing profit are limited.